DBRS Morningstar Confirms KBC Bank NV’s Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of KBC Group NV (KBC or the Group) including the Long-Term Issuer Rating of A (high) and the Short-Term Issuer Rating of R-1 (middle). Concurrently, DBRS Morningstar confirmed the ratings of KBC Bank NV (KBC Bank), the principal banking subsidiary of KBC, including the Long-Term Issuer Rating of AA (low) and the Short-Term Issuer Rating of R-1 (middle). The one notch differential in the long-term ratings between the parent company and KBC Bank reflects structural subordination. DBRS Morningstar has also maintained KBC Bank’s Intrinsic Assessment at AA (low) and the Group’s Support Assessment at SA3. The trend on all ratings remains Stable. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings reflects DBRS Morningstar’s view that KBC has continued to leverage its leading positions in its core markets and its bancassurance business model to report strong profitability levels. In addition, the ratings continue to be underpinned by KBC’s robust funding and liquidity profile, backed by its large and stable deposit base and substantial liquidity buffers. The ratings also continue to take into account the Group’s capital position, which remains at the higher-end of its peer group and well above regulatory requirements.

Whilst DBRS Morningstar expects defaults to rise due to weakening economic conditions, high inflation and rising interest rates, we consider the continued improvement in KBC’s asset quality metrics as leaving the Group well-positioned to absorb any potential asset quality deterioration.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require further improvement in the risk profile, whilst maintaining strong earnings generation and capitalisation.

Conversely, a downgrade would occur in the event of a sustained asset quality deterioration combined with a prolonged negative impact on profitability or capital.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong
KBC’s ratings are underpinned by its deep-rooted and leading bancassurance franchise in its core markets, with a solid position in both Belgium and the Czech Republic where it has well-positioned retail franchises. The Group’s franchise is further boosted by its meaningful market positions in Hungary, Slovakia and Bulgaria, recently reinforced by targeted acquisitions. DBRS Morningstar also views the exit from Ireland as positive given the Group’s inability to develop a leading market position in that country.

Earnings Combined Building Block (BB) Assessment: Strong/Good
The Group has been able to leverage its geographically diverse bancassurance franchise and continues to demonstrate solid profitability, with a reported return on equity of 14% for 2022, compared to 13% in 2021. KBC reported a net attributable profit of EUR 2.9 billion in 2022, compared to EUR 2.7 billion in 2021. Results were driven by strong revenue growth, particularly net interest income and trading income as well as solid performance in insurance whilst the performance in fees and commissions was more subdued. Despite growth in operating expenses, KBC reported positive operating leverage and was able to further improve its efficiency ratio, with the cost to income ratio adjusted for specific items, at 54% in 2022 compared to 55% in 2021. Whilst KBC reported net impairment charges in 2022 compared to net releases last year, the reported cost of risk at group level remained low at 8 bps for 2022.

On February 17, 2023, KBC Group announced that CSOB (Czech Republic) was imposed to pay compensation in a long standing case against ICEC-Holding. As a result, the Group will book an additional legal provision of EUR 149 million before tax in Q4 2022. Whilst DBRS Morningstar does not see this as materially affecting the analysis, this will result in a restatement of 2022 results.

Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar considers KBC’s risk profile as solid, combining the low-risk Belgian and Czech portfolios, with somewhat higher risk portfolios in other core markets. The Group’s asset quality has consistently improved in recent years including 2022, with the share of impaired loans declining to 2.1% at end-2022 from 2.9% a year earlier. DBRS Morningstar notes that whilst this improvement was visible across all the country units, it stems mainly from the disposal of EUR 1.1 billion of Irish non-performing loans (NPLs). However, DBRS Morningstar expects geopolitical tensions, rising interest rates and high inflation to lead to a rise in defaults, although we view KBC’s improved asset quality metrics to be a key mitigating factor, providing the Group with some flexibility to absorb any potential deterioration of asset quality.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
KBC’s robust funding position, based on the stable retail and mid-sized corporate deposit base in its core markets also supports the ratings. At end-2022, customer deposits represented 73% of total funding while the loan-to-deposit ratio was 79%. KBC Bank’s liquidity position is also solid in DBRS Morningstar’s view, with liquid assets representing around 40% of the balance sheet and LCR and NSFR ratios well above the regulatory requirements, at 152% and 136% respectively at end-2022.

Capitalisation Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views KBC’s capitalisation as robust, supported by its strong recurring capital generation. KBC reported a fully loaded Basel III Common Equity Tier 1 (CET 1) ratio, under the Danish compromise, of 15.4% at end-2022, fairly stable from 15.5% at end-2021. KBC also reported a fully loaded capital ratio of 18.4%. This provides KBC with an ample buffer over the minimum overall capital requirements (OCR) of 11.31% for CET 1 and of 14.81% for Total Capital. The 5.3% fully-loaded Basel 3 leverage ratio for the Group (under the Danish compromise) remained high at end-2022. KBC also reported, at Group level, a 203% Solvency II ratio, far exceeding the 100% regulatory minimum requirement. Proceeds from the sale of Irish activities are expected to generate around EUR 1 billion in capital, which KBC plans on distributing either through a share buy-back or extra dividend in 2023. DBRS Morningstar notes that the Group is already compliant with MREL requirements. At end-2022, KBC’s MREL ratio was 27.5% of risk-weighted assets (RWAs) and 8.7% of Leverage Ratio Exposure (LRE) compared to intermediary requirements at January 1, 2022 of 26.21% of RWAs and 7.34% of LRE.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/410199.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022).

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692 (June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, KBC Group Q4 2022 Quarterly Report, KBC Group Q4 2022 Earnings Presentation and KBC Group Q4 2022 Press Release. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/410195.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: William Schwartz, Senior Vice President – Credit Practices Group
Initial Rating Date: June 3, 2010
Last Rating Date: February 25, 2022

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